This paper studies a temporary exchange rate based stabilization plan in which agents face a sudden stop of capital inflows. The model generates a rising path of real interest rates in advance of the exchange rate collapse. This generates a time-dependent non-monotonic path of required premium on domestic assets. The model-generated asset price dynamics closely mimics its empirical counterpart as witnessed during recent collapses of exchange rate based stabilization plans. The model also reproduces consumption and foreign reserve dynamics that closely mimic the data.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12846.
Length: Date of creation: 08 Oct 2007 Date of revision: Publication status: Forthcoming in Review of Development Economics Handle: RePEc:isu:genres:12846
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Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance